In order to attract more foreign funds, markets regulator Sebi on Thursday decided to allocate a separate limit of Rs 5,000 crore to FPIs for taking long position in Interest Rate Futures (IRFs).

Currently, the foreign portfolio investor (FPI) limit for government securities is fungible between investments in securities and investment in bond futures.

The decision comes after Reserve Bank of India in August had proposed to institute a separate limit of Rs 5,000 crore for investment by FPIs in IRF.

The move is aimed at facilitating further market development and ensuring that FPIs’ access to bond futures remains uninterrupted during the phase when FPI limits on government securities are under auction.

"Accordingly, it has been decided to allocate a separate limit of Rs 5,000 crore to FPIs for taking long position in IRFs," the Securities and Exchange Board of India (Sebi) said in a circular. For each interest rate futures instrument, position of FPIs with a net long position will be aggregated. Besides, overseas investors with a net short position in the instrument will not be reckoned.

"No FPI can acquire net long position in excess of Rs 1,800 crore at any point of time," it added.

An IRF is a contract between a buyer and a seller for future delivery of an interest-bearing security such as government bonds.

Market participants like banks, FPIs, insurance companies, corporate houses and NBFCs can also trade in this product.

The circular would come into effect immediately.

Besides, Sebi has asked stock exchanges to put in place necessary mechanism for monitoring and enforcing limits of FPIs in IRFs.

The exchanges would aggregate net long position in IRF of all FPIs taken together at end of the day and would jointly disseminate the same on their website on daily basis.

Once 90 per cent of the limit is utilised, the exchanges would put in place necessary mechanism to get alerts and publish on their websites the available limit, on a daily basis.

In case, there is any breach of the threshold limit, the FPIs whose investment caused the breach would have to square off their excess position within five trading days or by expiry of contract, whichever is earlier.

The limits prescribed for investment by FPIs in government securities (currently Rs 3,01,500 crore) will be exclusively available for investment in it.